An investigation of the impact of interest rates and interest rate volatility on Australian financial sector stock return distributions

Robert W. Faff*, Allan Hodgson, Michael L. Kremmer

*Corresponding author for this work

Research output: Contribution to journalReview articleResearchpeer-review

21 Citations (Scopus)

Abstract

This paper extends the existing literature by analysing the dual impact of changes in the interest rate and interest rate volatility on the distribution of Australian financial sector stock returns. In addition, a multi-variate GARCH-M model is used to analyse the impact of deregulation on the financial institutions sector. It was found that there is a consistent intertemporal trade off between risk and return over the different regulatory periods. Moreover, finance corporations were found to be highly sensitive to new shocks across the financial sector and deregulation increased the risk faced by finance corporations and small banks - effectively increasing the required rate of return and explaining the continued rationalisation of these sectors. Furthermore, deregulation has changed the fundamental relationship between interest rates and large bank stock excess returns from positive in the pre-deregulation period to negative in the post-deregulation period. This reflects the changing institutional environment from one of controlled credit rationing to a more competitive environment.

Original languageEnglish
Pages (from-to)1001-1031
Number of pages31
JournalJournal of Business Finance and Accounting
Volume32
Issue number5-6
DOIs
Publication statusPublished - Jun 2005
Externally publishedYes

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